Genentech's Generous Outlook

We believe Genentech is a leading biotechnology growth company that has a competitive advantage developing treatments for cancer and autoimmune disease, given the company's strong drug development and commercialization track record, and depth of senior management and scientific personnel.

Over the next five years, Genentech could have a lower-than-industry-average development risk profile from label expansion of existing portfolio drugs, which could generate a five-year earnings per share (EPS) compounded annual growth rate (CAGR) of 21% from 2006 to 2011.

Forty percent of all deaths in the U.S. are cancer-related and Genentech benefits from the aging demographic profile in the U.S., Europe and Japan, which could expand the market for cancer drugs. We expect Genentech to achieve its 2010 goal of becoming the leading cancer company by sales in the U.S. The company is well positioned, in our view, to benefit from significant advances in understanding the molecular pathways of cancer and autoimmune disease, and advancing treatments to target those pathways.

Genentech could be appropriately valued at $91 per share. Our valuation is based on a price/earnings (PE) multiple of 38 times 2007 estimated EPS of $2.40 per share, a five-year CAGR of 21% from 2006 to 2011 and a PE/growth rate (PEG) of 1.8.

Genentech could achieve cumulative free cash flow of $12 billion over the next five years. In our view, Genentech deserves to trade at a premium PEG compared to other profitable biotechnology companies, which have historically traded at a PEG of about 1.5, given the firm's solid track record developing treatments for cancer and autoimmune disease, broad portfolio of products, and our view that the risk profile for earnings growth in new indications is lower than the industry average.

Our EPS forecast includes employee-stock-option expenses.

-- Douglas Chow

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